Renting vs. Building, By the Numbers
Explore a price comparison of a rented versus built home in North Carolina throughout a five-year timeframe.
Why do people rent homes for so long, even when they plan to stay in the same location for years? In most markets, if you’re going to live in one place for more than a couple of years, the cash you have to put forward for closing costs and other fees makes itself back up before you move out - so you come out on top of where you would’ve been if you’d rented for those years.
So, how does that math work out? What are the financial implications of renting versus building? The best way to break down these calculations is with as many constant variables as possible. We’ll assume the same square footage, same location, and the same amount of years: let’s compare overall spend, cost, and equity between renting and building a 1,600 square-foot home in North Carolina over the course of five years.
Up-Front Fees
Renting: Between security deposits, pet fees, and application fees, the cost of moving into a new spot for rent in North Carolina will generally come up to around $3K for a 3-bedroom, 1,600 square-foot place.
Building: Building a home in a state like North Carolina costs an average of $150 per square foot, placing our 1,600 square foot example at $240,000. The price of a lot itself can vary widely based on acreage and location, but in North Carolina there’s an abundance of options at or under the $70K mark, so we’ll operate there.
That puts the overall price of the new build right around $310K, of which you’d ideally put 20% down, which is $62K. Try not to see that down payment as a loss, though; that money stays with you because it becomes home equity. Your equity in your home is still your money in many ways - you can use it to invest, consolidate debts, and more.
In North Carolina, closing costs generally total around 2.2% of the home’s overall cost, bringing our example to about $7,000. Often, building a custom home can mean landscaping from scratch, which can run $3-5K. When all is said and done, up-front costs of building a home - including your down payment into your own equity - come up to about $74K.
Monthly Payment
Renting: The average price of rent per month for a 3-bedroom, 1600 square foot NC apartment is currently $1,395.
Building: After paying 20% down, with a 30-year mortgage at 3% interest, the monthly mortgage payment (principal and interest) comes to $1,045. Add in homeowner’s insurance at about $120 per month and property tax at $150 per month, and living in the home you’ve built costs an overall monthly payment of $1,315.
Now, even at first glance, the monthly payment on your own home that you got to build and customize to your heart’s desire is already lower than what you’d pay each month to rent a home that likely won’t feel quite like your own. Beyond those initial numbers is the fact that you’re building equity each time you pay into the principal on your home. Each time you pay down that loan, you’re buying more of your house and increasing your own equity.
In the $310K house you’ve built, you’d pay $183.89 per month in interest. Subtract that from the principal and interest monthly total, and you’re still left with about $860 per month you’re investing in your own equity every month.
After one year:
Renting: A year in, if you’ve chosen to rent, you will have paid $19,740 between rent and up-front fees. None of that money will ever come back to you - you’ve paid it, you’ve lived in the home, that’s it. No equity built.
Building: If you chose to build, of course the overall total coming out of the wallet and into the home is higher, particularly because of the up-front fees and the down payment. Overall, you will have paid $89,780 - but a huge chunk of that money is still yours, in equity.
The down payment of $62K and twelve months of principal payments at $860 per month put you at $72,320 in equity. That means you’ve only spent about $17,460 that you’ll never see again - less than the cost of renting.
After three years:
Renting: If you stay in the rented home for 3 years, you’re down $53,220 overall and have built no equity through your home.
Building: With building, your overall spend after three years comes to $121,340. Your equity has grown to almost $93K, meaning you’ve spent about $28K in costs that don’t come back to benefit your own equity - taxes, insurance, and interest.
After five years:
Renting: Another two years down the line, renting will have zapped away a total of $86,700.
Building: Living for five years in the home you built brings your overall spend to $152,900, with over $113K in equity. The cost to you, in interest and insurance and taxes, comes to just over $39K. That’s far less than half the money you lose on rent, and the differences only become more glaring as the years go on.
Plus, each year, you can reap the extra benefits of being a homebuilder by talking with your accountant about tax deductions, too!
While building a home may feel financially daunting, it truly is an investment that pays off - in equity, in comfort, and in a home that truly feels like yours. Get started on building your dream home and investing in your future with us today.
